Transparency International UK (“TI-UK”) recently published this guidance relating to mergers and acquisitions, private equity investments and other forms of investment.

As reported by the Ernst & Young 2011, 11th Global Fraud Survey:

“Despite the many recent examples of the perils of ignoring the fraud and corruption dimension of these assessments, a fifth of companies still do not consider it as part of M&A due diligence and a quarter never consider it in a post-acquisition review”.

TI-UK says that the guidance has been provided in the context of three considerations:

  • Anti-bribery due diligence should be applied to all investments, but on a risk-based approach, with the level of due diligence being proportionate to the investment and the perceived likelihood of risk of bribery.
  • In many cases the necessary information for due diligence may not be accessible such as in acquisition of public companies, hostile takeovers, auctions or minority investments.  This does not obviate the need for anti-bribery due diligence, but has an effect on the timing i.e. it may need to be undertaken post closure.
  • A good practice approach characterises ethical and responsible businesses but is also the most effective means for companies to manage bribery risks across multiple jurisdictions and in a changing legal and enforcement environment.

What to look for in anti-bribery due diligence

  • Has bribery taken place historically?
  • Is it possible or likely that bribery is currently taking place?
  • If so, how widespread is it likely to be?
  • What is the commitment of the board and top management of the target to countering bribery?
  • Does the target have in place an adequate anti-bribery programme to prevent bribery?
  • What would the likely impact be if bribery, historical or current, were discovered after the transaction had completed?

One startling statistic reported by TI-UK is that almost 50% of US corruption – related prosecutions in 2007 were connected to M&A transactions.

TI-UK say that the broad principles and approaches to anti-bribery due diligence apply to both M&A transactions and private equity investments, and this guidance is therefore written for both audiences.  However, the type of transaction and the size of the stake will clearly have an effect on the purchaser’s ability and resources to undertake due diligence, its assessment of investment risks accruing from bribery, and its ability to access and influence the target company. 

 “This guidance provides a generic frame work for applying due diligence, but purchasers will need to decide in each case what level of due diligence is appropriate.  Some targets will be judged to present low risks and to require lower levels of due diligence whereas others will have higher risks.  The size of investment should not be a determining factor as small investments can carry disproportionate risks; and moreover the material risks attached to bribery may not necessarily reflect the size of the bribe…”.

TI-UK refers to the facts that the Serious Fraud Office has already made several statements about the responsibilities and liabilities of private equity and institutional investors including in January 2012 when the SFO said

“Shareholders and investors in companies are obliged to satisfy themselves with the business practices of the companies they invest in…  It is particularly so for institutional investors who have the knowledge and expertise to do it.  The SFO intends to use the civil recovery process to pursue investors who have benefited from illegal activity.  Where issues arise we will be much less sympathetic to institutional investors whose due diligence has clearly been lax in this respect”.

The report goes on to suggest that the purchaser’s board members, senior management and investment committees should seek to develop a full understanding of bribery risks related to target companies during transactions in order to understand the investment risk.  The nature of the investment risk from bribery falls into four broad areas:-

  • Financial:  The financial data may be distorted or falsified e.g. the target’s sales figures may be inflated by contacts obtained through bribe paying;
  • Legal:  There may be inheritance of legal risks e.g. the purchaser may incur liability leading to fines and regulatory action;
  • Reputational:  For example, the purchaser may find that owing to publicity surrounding a poor acquisition, it is regarded that the less favourable partner or investment vehicle by others including institutional investors; and
  • Ethical:  Purchasing companies, or requiring individuals within those companies that are willing to engage in bribery, risks and infecting the ethical culture of the purchaser and having a deleterious effect on the organisation.   A corrupt target may introduce dishonest and corruption to the purchaser’s own activities. 

All in all this is a very useful guide which TI-UK has produced.

Those involved in mergers and acquisitions or institutional investors, and their advisors, will find this a very useful resource.

The report can be found here.